When a California woman volunteered in a Peruvian prison, she and the inmates stitched together one beautiful business plan.

Martha Dudenhoeffer Kolodny is sitting in a knitting circle in a sunbaked courtyard high in the Andes Mountains. The slender 58-year-old (known affectionately as Martita) is clearly one of the gang, immersed in the group's stream of chatter and laughter. But a quick glance at the surroundings—the dirt-covered floor, metal bars, concrete walls rimmed with barbed wire—reveals this isn't your average knitting circle. These women are inmates.

Kolodny has been visiting them every few months since 2008, when—at the prodding of her two daughters—she signed up for a voluntourism trip to Ayacucho, Peru, an arid, destitute town about 9,000 feet above sea level. The Del Mar, California, landscape designer was assigned to the local jail, a ramshackle, overcrowded institution that is home to 1,800 prisoners. Most of the 172 women there have been incarcerated for drug-related crimes. Desperately poor, many had turned to the cartels for work, earning $35 for every kilo of cocaine they transported.

As a volunteer, Kolodny tried to provide diversions by organizing volleyball games and delivering treats like Coca-Cola. Every afternoon, she would join the knitting circle: "I don't know how to knit or crochet, so for me, it was like magic to watch them." There was Carmen Diaz Pizarro, who could embroider the most intricate floral patterns. And Emma Cangana, who sewed stuffed toys for her children, living in a nearby orphanage. "I saw their creations and thought, 'Maybe we can do something with them.'"

So she ordered skeins of baby alpaca yarn and asked the women to knit as many items as they could before she returned to Del Mar. Kolodny left Peru with a duffel bag full of scarves, sweaters, and blankets, and sold them to her friends back home for a total of $4,000. She then formed a nonprofit called Maki (or "hands" in Quechua, the region's indigenous language) to sell the handicrafts at house parties and online at makiwomen.org. (Check out sample goodies below.) The women receive wages, which they send to their families or use to buy basics like soap.

With the leftover profits and her own money, Kolodny is funding upgrades in the prison, including two flushing toilets to replace the holes in the ground the women had been using. She is also renovating the children's area. (Kids can live with their moms until age 3.) With the improvements, Kolodny hopes to satisfy government criteria that would allow a teacher to meet with the children every day.

"Of course you wonder,'Well, where do I stop?'" Kolodny says. "But I decided not to think about that. I'm just going to keep doing whatever I can do for as long as I can.